Affordable Housing
Recommendation
Cities and counties should abandon burdensome and counterproductive affordable housing and inclusionary zoning policies. Instead, they should adopt less stringent land-use management ordinances to lower construction costs and increase housing stock.
Background
What is affordable housing? Affordable housing includes initiatives to bring "affordable" homes into a municipality. Affordability is defined by the government. It divides households into different strata based on income relative to the area median income (AMI), as defined by the U.S. Department of Housing and Urban Development. For example, moderate-income households are most often defined as those between 80 percent and 100 percent of the AMI.
Affordable housing initiatives are voluntary in theory. Governments try to entice builders to construct affordable units, so in exchange, they will offer builders "rewards" like increased building density or floor-area ratios. But governments may overstep their bounds and rig the system. Carrboro, for example, requires builders who do not offer 15 percent affordable housing to meet with the Board of Aldermen for an "Affordable Housing Review Meeting."
What is inclusionary zoning? Inclusionary zoning mandates affordable housing. Local governments require that a percentage of new home construction be designated as affordable. These homes are sold at a government-set price which does not consider construction cost or market value. Not only must builders sell affordable units at this price, they must also guarantee the home's affordability for a time period that can range from 10 years to perpetuity.
What is the effect of inclusionary zoning? Inclusionary zoning results in fewer new homes and higher prices for all homes. It is counterproductive for getting low- and middle-income families into homes.
Inclusionary zoning functions as a tax on homebuilders. Constructing new homes becomes more expensive. Builders take on administrative costs when they must guarantee the home's affordability for a set number of years. Additionally, affordable homes are most often sold at a below-market price; therefore, each sale of an affordable home represents a significant opportunity cost. As a result, builders will produce fewer homes. Some may even choose to do business in neighboring municipalities without inclusionary zoning ordinances.
Moreover, housing markets automatically produce affordable housing. As the incomes in an area rise, people buy larger, higher-priced homes, leaving behind homes that sell at affordable prices. (Just like "affordable automobiles" are often found in the used car market, affordable housing is typically found in the "used home" market.) Inclusionary zoning, especially when coupled with restrictive land-use policies, breaks down this process. These regulations increase the cost of all homes, not just new homes. As a result, middle-class families are priced out of the market. They can neither qualify to purchase government-mandated affordable homes nor afford to purchase a market-rate home.
What are the concerns with inclusionary zoning? Inclusionary zoning is ineffective, inefficient, inequitable, and probably illegal in North Carolina.
• Illegal — North Carolina law has a strict ban on rent control. Rental units are not included in inclusionary zoning for that reason. Even so, the ordinances could still be illegal. Chapel Hill, formulating its own ordinance, fears becoming a "test case" to challenge the law's validity.
• Ineffective — Inclusionary zoning produces the opposite of its intended effect: it produces less affordable housing, not more. A 2004 Reason Foundation study documented this in California. After the adoption of inclusionary zoning ordinances, housing production fell. Prices skyrocketed by $22,000 to $44,000 in median cities and by more than $100,000 in hot markets. Inclusionary zoning results in fewer homes sold at higher prices.
• Inefficient — Inclusionary zoning is costly. It functions as a "social welfare tax," reducing the supply of housing while increasing the cost. Both homebuilders and new homebuyers must pay. Reducing burdensome land-use regulations would lower home prices more effectively and cheaply. This decrease would lower construction costs, and therefore, house prices.
• Inequitable — Local governments have embraced inclusionary zoning because it provides affordable homes without government cost. But it forces homebuilders and market-rate homebuyers to subsidize the affordable home purchases. It amounts a hidden "social welfare" tax.
How can local governments provide affordable homes? Local governments should change burdensome land-use regulations. These regulations ("Smart Growth") include everything from specific road setbacks to open space requirements to architectural design standards. They significantly affect home prices: buyers pay a "planning penalty," an artificial inflation of the home's price as a response to these regulations. A 2006 John Locke Foundation policy report found Asheville buyers' planning penalty was $13,901 and Wilmington buyers' penalty was $21,675.
Overhauling land-use management ordinances — and, in particular, smart growth measures — would directly lower the cost of homes. That means the market would be able to provide more homes at lower prices, without targeting homebuilders and homebuyers.
Examples
Two North Carolina cities have adopted inclusionary zoning: Davidson and Manteo.
Davidson was the first, adopting the ordinance in 2001. Its inclusionary zoning ordinance mandates that 12.5 percent of homes be affordable (although builders of less than eight units may make a payment-in-lieu). Davidson requires these homes be affordable for 30 years.
Manteo adopted inclusionary zoning in 2003. It requires that 20 percent of homes in developments of five units or more must be affordable. Households with pre-approved loans apply for ownership of an affordable unit. The system ranks potential owners: residents and town employees of one year are preferred to four other categories, the last of which includes "general public."
Chapel Hill is about to be the first Triangle city with inclusionary zoning. The Town Council's task force delivered its final report in November 2006. The Council authorized $25,000 in January 2007 to pay a legal consultant, hired in that spring. The consultant delivered his first draft to the Chapel Hill Planning Department in June 2007. Since then, the Planning Department, Task Force, and consultant have been revising the ordinance.
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